Companies and Reflective Loss
The so-called ‘reflective loss’ principle bars a party who has suffered loss through a reduction in value of its interest in a company from claiming directly against the person who caused the loss to the company - rather than letting the company make the claim.
But there are limits to the reflective loss principle in the context of shareholders in light of a recent SC ruling1 – otherwise it could result in injustice.
A company (Marex) brought proceedings against two companies for non-payment under contract and accused the owner and controller (a Mr Sevilleja) of those two companies of asset-stripping them.
Marex sought damages against Mr Sevilleja for inducing or procuring the violation of its rights under a judgment and orders obtained in the commercial court for $US5.5m plus costs - by allegedly procuring the offshore transfer of over US$9.5m from their London accounts into his personal control. He had done this to defeat payment of that judgment against him and the companies were placed into administration.
Mr Sevilleja argued that Marex’s claim was barred by the reflective loss principle – a contention which was upheld by the Court of Appeal. Marex won its appeal to the Supreme Court.
The ruling
As the court expounded, this principle of company law was established in 1982 (Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)) – that “a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, is not in the eyes of the law damage which is separate and distinct from the damage suffered by the company, and is therefore not recoverable”.
A key question was whether the rule applied to company creditors; and also to what extent the rule against reflective loss should remain (if at all) in relation to shareholders.
The Supreme Court decided that the rule prohibiting reflective loss is limited to shareholders and does not extend to creditors.
The judgment is lengthy, but suffice to say that the Supreme Court justices were unanimous in their conclusion that “the bright line rule has a principled basis in company law and ought not to be departed from now”. It effectively overturned a number of decisions over the years which had restated and expanded the rule which had created legal problems and uncertainties.
That rule only applies to a shareholder who brings a claim qua shareholder for a reduction in the value of his shareholding, and not to a shareholder who has a separate and distinct claim in another capacity such as a creditor.
The win for Marex meant it could proceed with its claims against Mr Sevilleja – a win which avoided a “great injustice”.
1Sevilleja v Marex [2020] UKSC 31
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